MONEY TIMES: ‘Thoughts on the bear market’

By Jill Kerby. Published on Thursday, February 4th, 2016 at 11:31 am

A ‘hard landing’. Now those are two words to send shivers down the spines of some readers who’ve been through it before and are wondering this week if it is happening again?
I hope not. But global stock markets have now officially fallen into a ‘bear’ market, that is, a 20% drop in values since their April 2015 highs. Is it an “inevitable” correction, or a more serious sign that western economies are again entering recession?
More importantly, how will any of this affect you?
I’ve written many times in this column that great economic or geo-political events are outside the control of the ordinary worker or investor.
Instead, we’re debt serfs at the receiving end of the decisions taken and the outcomes directed by the unholy triangle of politicians, their unelected cronies in the world of high finance and industry and their creatures in the central banks.
Their collective ability to artificially set the price of credit and currencies for the past 43 years (since Richard Nixon arbitrarily took the United States off the post-World War II gold standard) has caused an overwhelming glut of state, corporate and individual debt, and it’s at the root of the massive wealth divide, with the richest insiders rewarded due to their easy access to cheap credit and the 99.9% left with the job of meeting interest payments as they fall due on this gargantuan, accumulated debt.
My understanding – such as it is – of why the markets have been falling so dramatically this year comes from other commentators, mostly supporters of the classic, ‘Austrian’ school of economics. (See www.mises.org for a vast archive of material).
At the core of their theories, first published in the early 20th Century, is that too much cheap credit, too much borrowing and spending, is a bad thing because it encourages poor and irrational investment decisions. It also artificially pumps up the value of assets used as debt collateral and it ultimately causes booms and busts.
The Austrians contend – accurately – that the post-bust process will always be unpleasant (bankruptcies, job losses, etc) but that an economic correction/recession/depression will return asset values (shares, property, bonds) to their correct values. It will clear out the corporate deadwood and allow new, sustainable investment and growth.
That didn’t happen in 2008. So pervasive and intertwined was (is) global debt at that the unholy alliance of politicians, corporations and central bankers decided to intervene and stop the inevitable bankruptcies and resetting of asset prices.
Sovereign and corporate debts were either rolled over (hence the quadrupling of global debt since 2008) or paid off by ordinary citizen/taxpayers. (We know all about that here in Ireland.)
Yet countries that were forced to reduce spending, raise taxation, pay down their debts, and to make a stab at reforming their fiscal decision-making process (like Ireland, Spain and Portugal) have seen some positive turnaround. In Ireland we’ve had the good fortune of having an established foreign export sector, flexible work practices and emigration outlets, high levels of education and a greater buffer of personal wealth than in the past.
The commentators I follow are not entirely in agreement about why the markets have fallen (and your paper wealth if you have a pension fund.) Their views include: “The markets were overpriced due to cheap credit and a correction was inevitable”; “There is too much debt and it is a drag on investment, production, consumption”; “Western consumers are ageing and are too indebted, contributing to the slowdown in China”; “The Chinese economy is on a rocky road from being an export to consumer economy. The party leaders are not infallible in their attempts to control this process”; “The instability in the Middle East, especially in how it has affected oil prices has spooked the markets”.